A Short Cut To Pulling Out of Investor-State Arbitration Under Treaties:Just Say No

Spring break is upon us at NYU and I'm making a big push to finish an essay on the design of a multilateral investment court along the lines of the initiative that Canada and the EU are now undertaking. One of the big transitional issues is this: since investor-state arbitration is likely to be indicated in many of a state's existing investment agreements, how to switch to the multilateral court as the exclusive forum for disputes under these treaties without the cumbersome exercise of modifying each one? A possible answer to this is that the multilateral instrument establishing the court would be a treaty later in time and thus, under the conflicts rules of the Vienna Convention on the Law of Treaties, would prevail over the prior investment agreements.

While this is surely logical, I am not certain that it is a fully adequate solution. To explain why involves delving into some rather dense international legal theory, at least for a paragraph or two. Bear with me.

There are treaty regimes to which a dispute settlement process is internal, such as the WTO legal system. In such regimes, the consent of the parties to the treaty to submit themselves to the tribunal is established by treaty regime and is an intrinsic element of their overall agreement. Investment agreements are not really like that as far as arbitration goes. Arbitration takes place in a forum outside the treaty regime and, fundamentally, must be based on agreement between the parties to the arbitration-the state and the investor. The treaty is an agreement between states; it does not constitute an agreement between states and investors. As this UNCTAD manual explains, The inclusion of investor-state arbitration in the treaty as a forum agreed by the states parties does not itself suffice for the forum (say ICSID) requirement of consent, which is an indispensable basis of the tribunal's jurisdiction.

Investment agreements such as BITs initially had state-to-state, not investor-state, dispute settlement. The latter really got going with ICSID, but ICSID was originally designed with investment contracts in mind, where there is a pre-existing agreement between the investor themselves and the state. So how, on the basis of a treaty between states, to establish the the requisite agreement to arbitrate between the state and any particular investor? The theory is that the specification in the treaty of investor-state arbitration as the forum constitutes, in addition to an obligation between states, a general offer to investors to arbitrate. That offer is accepted when a particular investor initiates proceedings in the specified arbitral forum. The offer to arbitrate is a legal effect created by the treaty but separate from the treaty obligations themselves, which are between states.

Now let's circle back to my opening question. It is less than entirely certain that the status of the instrument creating a multilateral court as a treaty later in time, within the meaning of the Vienna Convention, would per se cancel the legal effect of the prior treaty in terms of the offer to the the investor to arbitrate. This is an offer to investors, not an obligation between states. Thus the theory of conflict of obligations under different treaties doesn't necessarily apply to it.

But there is a rather straightforward solution. In transitioning to the multilateral investment court, in addition (obviously) to acceding to the treaty instrument that establishes the court, states also should issue declarations withdrawing their offer to arbitrate under existing investment agreements. Since there is no agreement to arbitrate until a particular investor accepts the offer as it were by filing a claim, a declaration withdrawing the offer to arbitrate is perfectly adequate as a unilateral act (though obviously in all instances where an investor had already filed, one could only transfer the case to the multilateral court with the investor's consent).

Now let's take the following situation. State A and State B have an existing investment agreement, which stipulates the forum of investor-state arbitration. But only state A wishes to replace investor-state arbitration with the multilateral court as the exclusive forum. While State A's declaration withdrawing the offer to arbitrate suffices to block any further claims by investors of state B in arbitration fora such as ICSID, State B may argue that state A is under an obligation to B in the treaty to continue to offer arbitration to State B's investors. In other words the provisions of the treaty on dispute settlement constitute not only an offer to investors to arbitrate but a state-to-state obligation to make the offer. Thus, in this situation, we might be back to the need for State A to negotiate with State B an amendment to the treaty, on the threat that if that amendment is not agreed to, then State A will denounce the treaty with B. In practical terms, there is likely to be some pressure on State B to go along, if it wishes to continue in treaty relations with State A. Also, as noted, State B's investors have no recourse against the withdrawal of an offer, because an offer can always be withdrawn before it is accepted. So if State B thinks that the withdrawal of the offer to arbitrate breaches the treaty, well, it can always try and pursue that claim in state-to-state dispute settlement.

But there is good news in all this complexity, even if it makes getting to multilateralism a little trickier than what at first sight appears to be the case. And the good news is that a state that is party to an investment agreement always has a sure means of shutting down future claims by investors if it needs to do that quickly, without renegotiating the treaty. Just withdraw consent to arbitrate, and no future claims are possible. Then worry about state-to-state dispute settlement concerning a breach of the treaty. That is likely to take years, with what remedy highly uncertain, leaving plenty of time to renegotiate, or if need be, denounce the treaty.

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A Short Cut To Pulling Out of Investor-State Arbitration Under Treaties:Just Say No

Spring break is upon us at NYU and I'm making a big push to finish an essay on the design of a multilateral investment court along the lines of the initiative that Canada and the EU are now undertaking. One of the big transitional issues is this: since investor-state arbitration is likely to be indicated in many of a state's existing investment agreements, how to switch to the multilateral court as the exclusive forum for disputes under these treaties without the cumbersome exercise of modifying each one? A possible answer to this is that the multilateral instrument establishing the court would be a treaty later in time and thus, under the conflicts rules of the Vienna Convention on the Law of Treaties, would prevail over the prior investment agreements.

While this is surely logical, I am not certain that it is a fully adequate solution. To explain why involves delving into some rather dense international legal theory, at least for a paragraph or two. Bear with me.

There are treaty regimes to which a dispute settlement process is internal, such as the WTO legal system. In such regimes, the consent of the parties to the treaty to submit themselves to the tribunal is established by treaty regime and is an intrinsic element of their overall agreement. Investment agreements are not really like that as far as arbitration goes. Arbitration takes place in a forum outside the treaty regime and, fundamentally, must be based on agreement between the parties to the arbitration-the state and the investor. The treaty is an agreement between states; it does not constitute an agreement between states and investors. As this UNCTAD manual explains, The inclusion of investor-state arbitration in the treaty as a forum agreed by the states parties does not itself suffice for the forum (say ICSID) requirement of consent, which is an indispensable basis of the tribunal's jurisdiction.

Investment agreements such as BITs initially had state-to-state, not investor-state, dispute settlement. The latter really got going with ICSID, but ICSID was originally designed with investment contracts in mind, where there is a pre-existing agreement between the investor themselves and the state. So how, on the basis of a treaty between states, to establish the the requisite agreement to arbitrate between the state and any particular investor? The theory is that the specification in the treaty of investor-state arbitration as the forum constitutes, in addition to an obligation between states, a general offer to investors to arbitrate. That offer is accepted when a particular investor initiates proceedings in the specified arbitral forum. The offer to arbitrate is a legal effect created by the treaty but separate from the treaty obligations themselves, which are between states.

Now let's circle back to my opening question. It is less than entirely certain that the status of the instrument creating a multilateral court as a treaty later in time, within the meaning of the Vienna Convention, would per se cancel the legal effect of the prior treaty in terms of the offer to the the investor to arbitrate. This is an offer to investors, not an obligation between states. Thus the theory of conflict of obligations under different treaties doesn't necessarily apply to it.

But there is a rather straightforward solution. In transitioning to the multilateral investment court, in addition (obviously) to acceding to the treaty instrument that establishes the court, states also should issue declarations withdrawing their offer to arbitrate under existing investment agreements. Since there is no agreement to arbitrate until a particular investor accepts the offer as it were by filing a claim, a declaration withdrawing the offer to arbitrate is perfectly adequate as a unilateral act (though obviously in all instances where an investor had already filed, one could only transfer the case to the multilateral court with the investor's consent).

Now let's take the following situation. State A and State B have an existing investment agreement, which stipulates the forum of investor-state arbitration. But only state A wishes to replace investor-state arbitration with the multilateral court as the exclusive forum. While State A's declaration withdrawing the offer to arbitrate suffices to block any further claims by investors of state B in arbitration fora such as ICSID, State B may argue that state A is under an obligation to B in the treaty to continue to offer arbitration to State B's investors. In other words the provisions of the treaty on dispute settlement constitute not only an offer to investors to arbitrate but a state-to-state obligation to make the offer. Thus, in this situation, we might be back to the need for State A to negotiate with State B an amendment to the treaty, on the threat that if that amendment is not agreed to, then State A will denounce the treaty with B. In practical terms, there is likely to be some pressure on State B to go along, if it wishes to continue in treaty relations with State A. Also, as noted, State B's investors have no recourse against the withdrawal of an offer, because an offer can always be withdrawn before it is accepted. So if State B thinks that the withdrawal of the offer to arbitrate breaches the treaty, well, it can always try and pursue that claim in state-to-state dispute settlement.

But there is good news in all this complexity, even if it makes getting to multilateralism a little trickier than what at first sight appears to be the case. And the good news is that a state that is party to an investment agreement always has a sure means of shutting down future claims by investors if it needs to do that quickly, without renegotiating the treaty. Just withdraw consent to arbitrate, and no future claims are possible. Then worry about state-to-state dispute settlement concerning a breach of the treaty. That is likely to take years, with what remedy highly uncertain, leaving plenty of time to renegotiate, or if need be, denounce the treaty.